February 5, 2010
Wilfried Vanhonacker: Emerging markets are a small part of global market cap compared with their GDP, which is a reflection of their potential. Dr Vanhonacker then drew out the rest of the panel with a series of questions.
Raghuram Rajan: After the crisis, the rebound was relatively quick in Asia because of incentives and policies. For example, in China, auto sales grew substantially because of tax incentives, while there was similar growth in India due to low real rates. It is important that India has focused on consumption and investment growth. Brazil has also focused on consumption (less so on investment). Going forward, some countries, such as Thailand, will need to boost investment even more. Since developed countries will grow around 1.5 pp slower than before, emerging markets will need to grow much faster to compensate and maintain global growth.
Regarding taking advantage of the growth in emerging markets, “frugal engineering” will become more important. One example is India building low-end, battery-operated refrigerators. We need to think about risks. China will have to change track over the next few years and move away from its export-led model toward more dynamic capitalism. China will need to allow rates to rise and the currency to move, and the US may seek to force it to change. In India, the state is weaker, and much more needs to be spent on infrastructure. Moreover, there are disruptive political forces.
Christopher Granville: There are two important considerations that each country needs to face: sustainability (it will be important to scrutinize each country’s policies) and stability (are countries forming policy that will add to stability?). China is certainly delivering on growth and sustainability. During the last crisis, Russia figured out that they have to get fiscal policy right, whereas this time they figured out they have to get monetary policy right. If Russia misses on consensus growth this year and next, it will only create opportunity.
Getting monetary policy right will undoubtedly mean slightly slower growth, but that growth will be more sustainable in the long term. One of the attractive factors of the Russian market is its large PPP of $15,000 per capita. Matching this huge productivity with the country’s endowment potential (resources) will drive tremendous growth.
Brazil has done an admirable job in redistributing wealth throughout the system. India’s move to increase reserve requirements in its banking system will also add to stability. And Russia, as Mr Shuvalov alluded to this morning, is in the process of returning to these goals. Russia will grow thanks to productivity gains and will encourage more migration. Demography has been disastrous in Russia but is improving thanks to a falling death rate. An open society is being encouraged to help bring back the diaspora.
Ravi Viswanathan: In order to understand India’s growth, it is important to consider it on a sector by sector basis. In India, the rural sector was fairly unscathed, while some industrial sectors contracted. The banking sector in Asia was of course less affected, as it was not as exposed to derivatives and the crisis. Also, Asian customs resulted in policy that preserved jobs and consumption. For instance, salaries were cut but jobs were kept, resulting in better community and morale. “Group solidarity” thus cushioned the downturn of the crisis. In summation, India’s success was partly due to culture and partly a more sound banking system.
Vijay Mallya: India has changed. Twenty years ago, it was a shackled economy, and the key was to open it up. It was essential to speak English. Intellectual capital was also vital, not just cheap labor. A young demographic is important going forward, and education continues to improve. Aspiration and upward mobility drive consumption. Government stimulus has not played a major part in growth. Rural India is home to more wealth, and agriculture is booming. The number of entrepreneurs is increasing by the day. Good regulations have saved Indian banks from global problems. The middle class numbers 300 mln now, but will grow to 400 mln over the next few years. In terms of risks, China’s government can act, while India’s is democratic and slow. India lacks infrastructure but this will be developed; 30 GW of power generation capacity will be built over the next few years.
Vsevolod Rozanov: Sistema is the largest Russian investor in India. The attraction of the Indian market was its size, growth, young population and good rule of law. Consumption did not dip during the crisis. We still see huge potential.
Lanxing Xiang: China believes that there is no universal model. Democracy and laissez faire are not universal concepts, but instead a religious belief. China believes in state-directed capitalism. China will ally with other BRIC nations, as it suits its purposes to encourage global diversity. In terms of risks in China, will the Communists lose the mandate of heaven? They worry about this and therefore there is a need to continue growing. Disparity of incomes is a real risk, and maybe 0.5% of the population controls 90% of the wealth.
James D. Wolfensohn: Jacques Chirac encouraged the bringing together of the BRIC nations on the sidelines of the G8. By 2050, India and China will account for nearly 50% of global GDP, but Brazil and Russia will account for only 4%. So, the real story lies in India and China. Meanwhile, we need to think about Africa and the Muslims.